The Breakdown - Will the SEC Appeal the Ripple Decision?

Episode Date: July 25, 2023

NLW looks at the SEC's hints around a potential Ripple appeal, plus more around Worldcoin and SBF behaving badly. Today's Episode Sponsored By: In Wolf's Clothing -- The first startup accelerator exclusively for Bitcoin and Lightning startups -- Applications for Cohort 3 open NOW -- https://wolfnyc.com/apply ** Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Tuesday, July 25th, and today we are catching up on a number of different crypto issues, including further reaction in the world coin launch, some intrigue around SPF, and discussion of the SEC's potential appeal in the ripple case. Before we get into that, however, if you are enjoying the breakdown, please go. go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello friends, what's going on? We are back with some updates. As I said, we've got a little bit of SEC appeals in the ripple case, a potential SBF

gag order, please God. But where we'll start is with some further follow-ups on WorldCoin. As the day went on yesterday, a lot of the first impression themes that we discussed on the show got really hammered in. An example comes from Airy Paul from Block Tower who wrote a highly viral thread about the market dynamic surrounding a launch like this. He wrote, Here's the basic crypto market manipulation model that produces the $10 billion plus valuations for startups.

Grant founders and investors the cap table locked. Airdrop a tiny percentage of float to retail. Then give market makers a multiple of that and incentivize them to set a price floor with options. The result is that retail traders see a price and liquidity on exchange. change, but that price reflects less than 5% often less than 1% of the tokens. Media breathlessly report on the quote-unquote success, VCs mark their books up and get to raise new funds on the basis of the fake marks. Then, three to 18 months later, the tokens unlock and the project's

price and liquidity have been accepted as real by retail, and insider tokens get dumped on retail. The legality of this gets subtle and varies by region. The ethics of it are pretty simple, in my opinion. I've been asked a few times if I'm claiming conspiracy. Not really. Some of the participants in the conspiracy might honestly not understand the game they're playing. That's the power of incentives. You can guarantee market manipulation and wash trading without any communication between the relevant parties, just with the market maker incentive structure and inherent incentives in the VC business model. I don't have a good solution other than investors being more critical of these variables. Investors in VC funds need to think critically about how pseudo-liquid assets are marked,

and whether marks are real when the price is derived from less than 10% of tokens. And retail needs to be more critical and skeptical of everything. Price is only as real as it reflects the open market participation of all holders of the asset. Great little sum up from Erie there. Now, the other thing that started to come up a lot yesterday was questions of U.S. legality. This was particularly after a kind of evasive answer on the bankless podcast. There was one portion of the bankless interview with project co-founder Sam Altman and Max Blania, where they were asked about how the tokens will be distributed to people,

and they sort of brush the question aside, saying that they can't get into it due to, quote, regulatory uncertainty in the United States. CryptoLaw.us founder Johnny Deaton said, WTF did this dude just say? Did he literally say that he can't talk about how Worldcoin is distributed because of regulatory uncertainty in the United States? If there was ever a signal to run away as fast as you can from a project, here it is. Is he saying you can't tell how to acquire it or what you're acquiring because he might get sued?

Now that I think of it, is he being smart and just following legal advice, or is he a moron? This is an example of the chaos cause when you have bad faith regulators like Gary Gensler, intentionally keeping the regulatory environment as unknowable. Dr. Nick A from Factory Dow writes, Lowell what? The distribution of the token is literally the most basic bit of information anyone needs to make a decision on buying the token. Are they literally not disclosing the emission schedules because of regulatory uncertainty? Gabriel Shapiro from Delphi Labs writes,

Naturally, regulatory problems are best addressed by adding as many information asymmetries as possible. Regulators love that. And Austin Campbell quote tweeted and said, piggybacking on a great point by Lexnode here, one of the best offenses for almost any project is transparency. This greatly increases your odds of avoiding severe penalties because you aren't defrauding or abusing anyone when you give them all the info fairly. So I guess the thing to note here is that people don't like this evasive answer, but they potentially have different interpretations of how much they're blaming WorldCoyne versus blaming the SEC and other regulators for the weird environment that we're in.

Now, to the extent that there is a positive from all of this, it is definitely stirring up a conversation about things like privacy and biometric data. Real Vision CEO Raul Paul wrote, On WorldCoin, no view on the token, but 60% plus of the people on here already use Apple Face ID, and 90% gave all your private data to Google and meta. You also have a passport, have global entry, use a credit card, carry a mobile phone, are captured on CCTV at all times, have medical records, etc., all of it centralized. Also, India rolled out retina and fingerprint scans for payments a few years ago, and it's incredible. You can literally buy a pint of milk with just a fingerprint, no phone, no wallet, no cash. We definitely need digital idea of humans urgently and WorldCoin one answer. There will be many,

but it is vital. The next step is fully decentralized versions with ZK proofs too. It too will come and is needed and desired. Worldcoin is another example of how blockchain changes everything and how it gets to one billion people, CBDCs too. The fight will be over centralization versus decentralization. Our physical nation-state stuff will be centralized, and our digital nation-network-state stuff will be mainly decentralized. I think the latter will end up more powerful. A last note for what it's worth, investor Jeremiah Awing polled his followers on Twitter or X or whatever we're calling it now, asking, are you going to adopt world coin crypto by Sam Altman? He says the goal is a coin for universal basic income. I-verification is required at an orb station. Face ID slash government

ID photo is already required to enter most banking systems. Many phones capture face and our faces are recorded countless times in public a year. In other words, Jeremiah is certainly pointing out that a lot of this already happens. And yet still, 71.7% of respondents on that poll, who by the way are by and large not crypto people, say that no, they will not adopt World Coin. I don't know how much signal there is, but it's just another interesting little bit of data. Before we move on, I just want to take a quick moment to acknowledge this episode's sponsor in Wolf's clothing.

Wolf is the first startup accelerator dedicated entirely to Bitcoin and Lightning. The program is in-person, features mentorship, guaranteed funding, and a chance to be a part of a community that is working on some of the biggest challenges surrounding Bitcoin and a world that is powered in more ways by Bitcoin. The people who run the program are great, the companies that have gone through it so far are awesome, and they are currently accepting applications for their third cohort coming up this fall. If you're interested, go check it out at Wolf and,

NYC.com. You can find out more information about the program and how to apply. Thanks again to Wolf for supporting the breakdown. And now back to the show. Next up, let's move over to Ripple. It's now been 11 days since the order in the Ripple case were handed down. And subsequently, a massive part of the speculation since then has hinged on whether the SEC will appeal that decision or if they will allow it to stand. In a doorstop interview late last week, SEC Chairman Gary Gensler indicated that the agency was still reviewing the case and considering its options. Because there are still a few outstanding issues in the Ripple case that will proceed to a full trial, the SEC is able to wait until the entire case is decided before bringing an appeal.

However, if the agency wants to specifically appeal the orders delivered this month, they will likely need to get moving. On Sunday, Coinbase's Paul Grewell tweeted, Although the court's rules are silent, 10 days always made sense to me as the right deadline to seek district court certification of an order for interlocutory appeal. After all, that's the deadline to petition the appellate court, 10 court days from Judge Torres's ruling is tomorrow. Now, on Friday, we got the first clear indication that the SEC thinks the Ripple decision was incorrect, potentially hinting at an appeal in the works. In a new filing in the SEC's case against Terraform Labs and its former CEO, Doe Kwan, the agency claimed the ripple decision was flawed

and could be appealed, urging the judge not to rely on it as precedent. Earlier in the week, Terraform Labs had filed a memorandum, noting that the Ripple decision strengthened their motion to dismiss the case. The SEC's response to that said, quote, contrary to Terraform's assertions, much of the Ripple ruling supports the SEC's claims in this case and rejects arguments Terraform have raised here. The SEC argued that, with regard to the ripple sales that were ruled to not be the sale of unregistered securities, that the decision, quote, conflicts with and adds baseless requirements to Howie and its progeny. For that reason, the SEC said that, quote, respectfully those portions of Ripple were wrongly decided, and this court should not follow them.

SEC staff is considering the various avenues available for further review, and intends to recommend that the SEC seek such review. So basically, the SEC is arguing that the judge in the Ripple case went beyond the Howey test and introduced novel elements of law in applying Howie to the facts of the case. Now, in this filing, the SEC laid out their reasoning for thinking the Ripple decision was incorrectly decided. They addressed specifically the distinction drawn between sales to institutional investors and the general public. They claim that the Ripple decision, quote, creates an artificial distinction between the expectations of sophisticated institutional and retail investors, impropriately transforms Howey's reasonable investor inquiry into a subjective one, and turns on its head the reasoning underlying

Howie and other cases. The SEC argues that although Terraform have pointed to a hodgepodge of reported factual differences regarding institutional investors, overall the ripple decision in fact strengthens the SEC's position in the Terraform case. The SEC filing argues that, quote, the court must draw reasonable inferences in the SEC's favor, including that the institutional buyers in this case, such as trading firms that purchase Terraforms crypto assets with no restrictions on resale, purchased because they view the assets as an investment opportunity into Terraform's efforts. Wrapping up the argument, the SEC draws the conclusion that, quote, the underlying logic of the Ripple ruling is divorced from basic principles behind Howie,

and the federal securities laws more broadly. When distinguishing between classes of investors, courts construe the federal securities laws provisions to provide more, not less, protection to retail investors. Now, this is getting into the legal weeds, but one thing I did want to point out is the crypto industry kind of laughing at the hilarity of the SEC's position, that in some ways the judge was a genius and in other ways she was an idiot. Lawyer Collins-Belton tweeted, Love the ability to maintain the view that the judge didn't know what they were doing, except in the one area we won where she was totally right and genius. Amazing.

Now, as we close out today, drama in the FTX case is on the rise again. The judge overseeing Sam Bankman-Fried's criminal trial is considering forbidding parties and witnesses from communicating with the media. Please, please, for all of our sake, go for it. But in specific, the controversy began last Thursday when the New York Times published an article including extracts of Carolyn Ellison's personal journal from her time within the broader Sam Empire. Carolyn was promoted to CEO of affiliated trading firm Alameda Research shortly before FTX collapsed and is a cooperating witness in the criminal case against Sam. On Friday, prosecutors alleged that the New York Times obtained Carolyn's

journal from Sam himself, and that the leak was a brazen attempt to intimidate and discredit her as a material witness. In this way, they opened concerns that this conduct could make a fair trial difficult, and that the public disclosure of private information could taint a jury pool. They suggested, then, that parties to the case, including Sam, should be gagged from speaking with the media in relation to the forthcoming trial. On Sunday, SBF denied accusations that he was attempting to intimidate or embarrass Carolyn, but acknowledged handing over the material to reporters. His lawyers wrote in a letter to the court that, quote, the government has taken a set of circumstances where nothing improper or impermissible occurred and has unfairly recast the events as an efferious attempt by Mr. Bankman-Fried to, quote-unquote, discredit

Carolyn Ellison and quote-unquote tate the jury pool. But Mr. Bankman-Fried did nothing wrong. In the letter, Sam agreed to the gag order, but asked that it be applied to witnesses in the case as well. Sam's primary concern throughout the letter was the unfavorable press coverage he has been receiving, which he partly blamed on public statements made by F.TX Estate CEO, John J. Ray the 3rd. He said that the comments from Ray had, quote, created a toxic media environment that has left Mr. Bankman-F freed with little choice but to respond. And while SBF acknowledged handing over segments of Ellison's journal, he denied that they were part of evidence in the case. According to his lawyers, the newspaper already had the story completed and were seeking comment,

and so he claims that the additional material he presented didn't really add much. He denied that his actions were intended to harass discredit or even cast Ellison in a poor light, but suggested that the New York Times article had been positive towards Caroline and negative towards himself. Now, ultimately, this matter will be determined in court on Wednesday, but the response from the crypto community was just a lot more head-shaking, best summed up by Crypto Yeti, who wrote, SBF, he's a real piece of work. Now, one last bit of drama to watch. At the end of last week, photos of Sam apparently walking around New York City started appearing,

with many jumping to claim that he was near the Southern District of New York Attorney's Office. As you might imagine, speculation has run wild that he was there cutting some sort of deal or perhaps giving information on something that he knew about. But when it comes to specifics, I guess we're just going to have to wait and see. Anyways, guys, that is going to do it for today's show. Lots of intrigue, lots of drama, wouldn't be crypto if there wasn't. I want to say thanks one more time to my sponsor in Wolf's Clothing. Remember to check out WolfNYC.com to apply for their next cohort.

And of course, thanks to you guys for listening. Until next time, be safe and take care of each other. Peace. Thank you.